More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
Today, an increasing number of financial advisors are taking a holistic approach to managing their clients’ assets and becoming the trusted advisor of choice. As you know, a key element to this transformation is that advisors are now monitoring, reporting and often advising on held-away accounts that were previously not under direct management, such as 401(k)s, 403(b)s and other accounts that are not with a primary custodian. For you, as an advisor, this raises the obvious question: “What do I need to know about billing on held-away assets?”
Here are six vital issues to consider when you bill for services on held-away accounts:
- Custody Issue
Do you wish to have custody over your clients’ accounts? Since SEC Rule 206(4)-2 was changed, the rules on taking custody are now more stringent than ever. They even include surprise annual examinations by an independent public accounting firm that’s registered with the Public Company Accounting Oversight Board (PCAOB). However, it’s also true that you don’t need to have custody to manage a client’s held-away assets or to bill for the advice you give on those accounts. Using an account aggregation engine is one way to give yourself the opportunity to manage and bill, without taking custody.
- Fee Schedule
You have options when it comes to determining how much you’ll charge for these additional services on held-away accounts. Many firms charge at least 50 to 75 basis points. Or…you can roll your charges into a larger, all-inclusive financial planning fee.
- Billing Mechanism
While you can’t bill directly to a client’s retirement account, there are a number of ways to receive your fees—from deducting from a brokerage or bank account to receiving a check. You can also use ACH and credit card options. In every case, it’s possible to work with an account aggregation provider that integrates its technology with your billing capabilities, an excellent way to streamline the process.
- Client Contracts
Of course, you’ll need to obtain proper authorization from your clients to bill for managing their held-away assets. The best approach is to create a client-friendly document that lays out the intent of the agreement, and to include a series of schedules that can easily accommodate any changes that need to be made. These should include a schedule that lists each account, the level of authority you have, and where it will be billed…and a separate schedule that outlines what services you will offer and the fees involved.
- Communication Strategy
When you bring a new client on board, you may wish to position your reporting and advice on held-away assets as your customary way of doing business—a compelling competitive differentiator for your firm. With existing clients, you may find that it’s best to introduce the topic during routine meetings or phone calls—both good opportunities to describe the many benefits of the services involved.
- Implementation Plan
Before you make announcements to clients, you need to assess the anticipated change in your staff’s workload and how it will impact your day-to-day operations. In fact, it makes sense to start with just a few clients to measure the overall impact, then roll it out to the rest of your clients in a staggered fashion.
For more information on this topic, see my whitepaper Bring Held-Away Assets into the Fold: The Definitive Guide to Billing for This Service.